Is Now the Time to Buy Xstrata?

LONDON -- I'm always searching for shares that can help ordinary investors like you make money from the stock market.

So right now I am trawling through the FTSE 100 (UKX) and giving my verdict on every member of the blue-chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.

Today I am looking at Xstrata (ISE: XTA) to determine whether you should consider buying the shares at 1,040 pence.

I am assessing each company on several ratios:

Price/Earnings (P/E): Does the share look good value when compared against its competitors?

Price/Earnings-to-Growth (PEG): Does the share look good value factoring in predicted growth?

Yield: Does the share provide a solid income for investors?

Dividend Cover: Is the dividend sustainable?

So let's look at the numbers.

Stock

Price

3-Year EPS Growth

Projected P/E

PEG

Yield

3-Year Dividend Growth

Dividend Cover

Xstrata

1,040 pence

88%

13

N/A

2.5%

400%

4.8

The consensus analyst estimate for this year's earnings per share is $1.26 (down 34%) and dividend per share is $0.39 (down 3%).

Trading on a projected P/E of 13, Xstrata appears to be about twice as expensive as its peers in the Mining sector, who are currently trading on an average P/E of around 6. Xstrata's strong P/E and negative growth rate combine to give a negative PEG ratio, which cannot help with my analysis.

Offering a 2.5% yield, the dividend is slightly below the mining sector's average. However, Xstrata has a three-year compounded dividend-growth rate of 400%, although this figure is skewed, as Xstrata slashed its dividend during 2009.

On the other hand, the dividend is currently just under five times covered, giving Xstrata plenty of scope for further payout growth. The level of cover is expected to fall to 2.5 times next year, however, but this still gives plenty of headroom.

Historically strong; what about the future?I believe offering an opinion on a company in the middle of a complicated merger process, as Xstrata is with Glencore, can be difficult. That said, historically Xstrata has been one of the best success stories of the FTSE. I believe whatever the outcome of this megamerger, the success story of Xstrata is set to continue.

In my opinion, Xstrata's half-year report presented a mixed picture. The miner saw operating profits drop 42%, although the shortfall was less than analysts had predicted. The company also raised its dividend by a super 35%, which may have been possible only because of the aforementioned high dividend cover. Xstrata also stated that its net asset value was around 1,000 pence a share, which is only slightly below the current market price.

The current merger with Glencore highlights the company's future potential. I reckon Glencore is one of the strongest firms in the Mining sector, because of its diversified nature and highly cash-generative operations. The current merger, I believe, will only improve returns for all shareholders involved.

Indeed, the current offer price from Glencore provides a slight premium to Xstrata's current share price. Taking this premium into account, alongside Xstrata's track record and the benefits of a combined Glencore-Xstrata, overall, I believe now looks to be a good time to buy Xstrata at 1,040 pence.

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In the meantime, please stay tuned for my next verdict on a FTSE 100 share.